One Thing & Another

Delray Beach, FL

Notes From My Journal: That was then…

I wrote this in my journal 8 years ago – in November 2010:

A client of mine has been interviewing people for a CFO position. She was excited about one candidate in particular. He had an Ivy League pedigree, had worked for one of her competitors for seven years, and had just moved into the area. She felt he was perfect for the job.

When I next met with her, a week after the interview, I asked her if she had hired the guy.

“Oh, no,” she said. “He was a weirdo.”

I asked her what she meant.

“I don’t know,” she said. “I can’t explain it. We were at a restaurant and I was telling him about the job but the entire time he was looking over my shoulder at other people. He told me he wanted the job, but I got the feeling that I bored him. I don’t want to work with anyone I bore.”

Today’s Word: meretricious (adjective)

Something that’s meretricious (mare-uh-TRIH-shus) appears to be attractive but has no real value. The word suggests pretense, insincerity, and cheap, flashy ornamentation. Example from The Great Gatsbyby F. Scott Fitzgerald: “His parents were shiftless and unsuccessful farm people – his imagination had never really accepted them as his parents at all. The truth was that Jay Gatsby of West Egg, Long Island, sprang from his Platonic conception of himself. He was a son of God… and he must be about His Father’s business, the service of a vast, vulgar, and meretricious beauty. So he invented… Jay Gatsby… and to this conception he was faithful to the end.”

Fun Fact

Each king in a deck of playing cards represents an historic figure:

*Spades: King David

*Clubs: Alexander the Great

*Diamonds: Julius Caesar

*Hearts: Charlemagne

From My “Work-in-Progress” Basket

Principles of Wealth: #17 of 60*

Acquiring financial assets is a necessary part of building wealth. But the prudent wealth builder is careful in doing so. He knows that every financial asset has its own characteristics, its own advantages, its own risk profile, and its own disadvantages.

Take real estate…

Over a period of maybe 20 years I invested in six or eight deals with EP, one of my closest friends. He built high-end residential communities in South Florida.

The investments I made were contributions to a limited partnership. I was a limited partner. EP and his partner were general partners. When you invest in real estate limited partnerships, you get most of the benefits that you get from developing real estate yourself but with two advantages: You don’t have to manage the development, and your potential loss is limited to your investment.

Overall, I did reasonably well. If I had to guess, I’d say my annual ROI amounted to 15%. But the individual results varied widely.

On one deal, I doubled my money in less than two years. On another, I made a 60% return in three years. One deal went broke and I got nothing back. The rest were in between.

In all of them, the management group was the same, the deals were structured pretty much the same, and the developments were all in South Florida. So why were my personal results so varied?

It was because of factors that, when I began investing in real estate, I had never considered.

Timing, for example…

One deal got held up for almost two years because of evidence that the land had once been an Indian burial ground. Ultimately, it was decided that it wasn’t – or that if it was it was insignificant. But with large development projects, time is money. And the cost of those two years was so great that the project, even though it sold well, never made a profit.

Another one, a development of about the same size, had three advantages: It was completed ahead of schedule, and at the peak of the real estate bubble, and it sold out within three months of being on the market. This is the one where I doubled my money.

And another one, which was finished the following year, went bankrupt.

So far, I’ve been talking about one specific type of real estate investing: large residential developments through limited partnerships. But about halfway through my run with EP, I tried something else. I began to buy inexpensive single-family houses, fix them up, and rent them out. I

I’m not sure why I was attracted to that market, but I was smart enough to start small and move slowly. It was clearly the right approach, because investing in rental residential properties turned out to be a very different experience than the investing I’d done with EP.

Acquiring rental properties, I found out, has some distinct advantages. The first is that it is relatively easy to understand. You find out how much it will cost to buy and restore a particular house. You compare that to the rent you can get from it. And if the numbers work, you buy.

The second big advantage is that if you stick to the math you don’t have to worry about market tops and bottoms. Housing prices can go up and down and sometimes do so drastically. But rents? They move slowly. And except in certain cases that are easy to identify, they tend to move upwards.

The big challenge with rental properties is management. Managing property is its own thing. It’s a completely different business than investing, and it takes a different set of skills and a different temperament.

I don’t have that temperament, so I never managed any of my properties myself. I had people – usually minority-share partners – that did it for me. Paying for their work meant my income would be less. But my time was freed up to do more investing (and I never had to handle a troublesome tenant).

The tradeoff allowed me to build a fairly substantial portfolio of properties over the years while having a full-time job, several side jobs, a family, etc.

Another sort of real estate I’ve done is land banking. Land banking means buying up raw land and holding it, hoping it will appreciate. The upside is considerable. If you can afford to hold on to the property for 10 or 20 years, it’s possible to see a substantial ROI.

But that’s only if you are right about its potential value. If the property doesn’t appreciate as you expect, you can end up losing money because the cost of maintenance, even for raw land, can eat up profits. (I wrote about one such experience here.)

Another sort of real estate investing I’ve done is buying and flipping houses. This can be fun and profitable if you like that sort of thing. Even during an up market, you can pick up houses that are undervalued because of some aesthetic or structural issue that seems worse than it is. If you can find undervalued properties and have the ability to fix them quickly and cheaply, you can make good money. The big challenge here is your emotions. You have to be able to stop buying and exit the market when the bargains no longer exist.

I’ve also invested in apartment buildings. They, too, have unique advantages and challenges. The big advantage is the cost of management. For a 50-unit building, it could easily be 5% or 6% of your rent roll; for a single-family home, it would be closer to 10%.

The challenge with investing in larger apartment buildings is that this kind of real estate is typically valued by cash flow, not intrinsic property value. So if you are in a seller’s market, it’s going to be difficult if not impossible to buy at a good price. Sometimes, however, you can find a building in some sort of distress that can be restored and then rented out at a good rate.

And finally, I’ve been an investor in a huge residential resort in Nicaragua. I made more than 10 times my initial investment in the first five years, and then parlayed that into millions in additional profits. A year ago, the property itself had a value of probably several hundred million dollars.

But then, several months ago, Nicaragua slumped into political turmoil. Now I’m wondering if the property is worth anything at all.

All of these stories are about one investment sector: real estate. As you can see, each type of investing within this sector has its own opportunities, challenges, and risks. And you cannot expect to be successful in one type if you approach it with the same expectations you can reasonably make for another type that you have done before.

Investing in stocks is similar. Investing in blue-chip stocks is very different from investing in penny stocks. Investing for growth is different from investing for income.

And then there are bonds and commodities and precious metals and so on and so forth. Each sector is different from every other one, and each type of investing within a sector is different.

The takeaway may be this: You can’t be a master of all types of investing, and being a jack of all is no way to invest.

* In this series of essays, I’ll be rethinking and expanding upon many of the observations I’ve made over the years about wealth: What it is, what it’s not, how it can be acquired, and how it is usually lost.

Worth Quoting

“We never really know what stupidity is until we have experimented on ourselves.”